I’ve always said a paid-for home is the foundation of financial independence. You have to live somewhere and you can’t live in an RRSP. Most of us have a simple choice: either become a homeowner or rent from someone who is a homeowner.
You may rationalize when you’re young that you don’t want to be tied down to a mortgage. But consider that when you’re renting, you are still paying a mortgage: your landlord’s!
The problem with being a perpetual tenant is that the rent will never stop and your landlord will likely hike the rent in line with inflation. When you own your own home, the total outlay may exceed your rent in the first few years but eventually, as you pay down principal, more and more of your mortgage payments will be used to pay down still more principal, and less interest relative to principal.
Tie this in with taking advantage of the annual prepayment privileges – generally 10 to 15 per cent of initial principal – and there will come a day when your mortgage is fully paid off. On that fine day, you’ll no longer be paying interest or principal and the home will be owned free and clear. For the rest of your days, you’ll be able to live rent-free!
Let’s say that took 10 years to accomplish. Compare it to the 10 years, if you continued to rent. In year 11, you’d still be renting and likely shelling out a good deal more per month than when you first signed your lease. And unlike the mortgage, there would be no prospect of those rent payments ever ceasing. But the homeowner who paid off the mortgage after 10 years will forever more be living essentially rent-free, although of course there will still be property taxes, utility bills and perhaps maintenance fees if you own a condo.
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